Section 94 IBC Process Not Shield For Personal Guarantors To Stall Recovery: NCLAT

The National Company Law Appellate Tribunal (NCLAT) has slammed personal guarantors for using insolvency proceedings as a tactical weapon to frustrate lawful recovery, ruling that Section 94 of the Insolvency and Bankruptcy Code, 2016 cannot be weaponized to shield assets from enforcement under the SARFAESI Act, 2002. In a stern warning against the misuse of interim moratoriums, the Tribunal clarified that the resolution process is reserved for bona fide applicants seeking genuine debt restructuring, not for those orchestrating litigation to dodge imminent possession notices.

A Principal Bench comprising Justice Mohammad Faiz Alam Khan (Judicial Member) and Mr. Naresh Salecha (Technical Member) delivered the decision while hearing an appeal filed by a personal guarantor. The Appellant challenged an order passed by the National Company Law Tribunal (NCLT), Mumbai, which had rejected his second petition for insolvency resolution on the grounds that it was a mala fide attempt to obstruct recovery proceedings initiated by a co-operative bank.

Key Takeaways

End of Tactical Moratoriums

Personal guarantors cannot repeatedly file Section 94 petitions to trigger interim moratoriums solely to stall physical possession of secured assets by financial creditors.

Bona Fide Intent is Mandatory

The Adjudicating Authority must examine the timing and conduct of the guarantor to ensure the insolvency process is invoked for its intended purpose of resolution and not as a tool for obstruction.

SARFAESI Dominance in Default

Where recovery proceedings have reached an advanced stage, such as the issuance of a possession notice, subsequent IBC filings will be closely scrutinized for abuse of process.

Procedural Gaps and Creditor Rights

Financial creditors retain the right to challenge insolvency reports if the debtor's history reveals a pattern of persistent lack of good faith and failure to propose meaningful repayment.

Court Rejects Abuse of Legal Process

The NCLAT observed that the Appellant had already enjoyed the benefits of an interim moratorium for nearly two years under a previous petition, which was eventually withdrawn on technical grounds. Immediately upon receiving a fresh possession notice under Section 14 of the SARFAESI Act, 2002, the Appellant filed a second petition. The Tribunal found this sequence of events indicative of a strategy to stall the recovery of over ₹19 Crores.

The Court, in its reasoning, observed: "Section 94 of the Code has been enacted for the benefit of those personal guarantors who are genuinely interested in the PIRP and in submitting repayment plan. However, the said process may not be allowed to be misused by those personal guarantors who are using the same only as a shield to frustrate the recovery proceedings initiated by the financial creditors for enforcement of their security interest."

Addressing the Appellant's conduct, the Court further noted that no attempt at repayment was made despite demand notices and arbitration awards. The Tribunal remarked: "This clearly shows that the petitions are not a bona fide attempt of resolution but an attempt to misuse the interim moratorium under Section 96 to stall SARFAESI proceedings and shield the secured asset."

The Court has following directions:
"In view of above, we do not find any good ground to interfere in the judgment passed by the learned adjudicating authority. Resultantly, the appeal filed by the appellant appears to be without merits and is dismissed as such. There is no order as to costs. Pending IA’s are also disposed of."

Ratio

The benefit of the Personal Insolvency Resolution Process under Section 94 of the Insolvency and Bankruptcy Code, 2016 is restricted to individuals seeking genuine resolution. The Adjudicating Authority is empowered to reject applications that constitute an abuse of process, particularly when the timing of the filing coincides with enforcement actions under the SARFAESI Act, 2002 and the debtor demonstrates a lack of bona fide intent to repay.

Background

The dispute originated from credit facilities, including term loans and cash credits, extended by Abhyudaya Co-Operative Bank Ltd. to M/s Veer Wires Private Limited. The Appellant, a director of the corporate debtor, had executed a personal guarantee for these facilities. Following a default and classification of the accounts as NPA in 2021, the bank initiated recovery measures under Section 13(2) of the SARFAESI Act, 2002 and obtained an arbitration award under the Multi-State Cooperative Societies Act, 2002.

The Appellant moved his first petition under Section 94 of the Insolvency and Bankruptcy Code, 2016 in November 2023, which was withdrawn in October 2025 because the guarantee deed was not annexed. As soon as the Court Commissioner issued a new notice for physical possession of a flat, the Appellant filed the second Section 94 petition in February 2026. The NCLT Mumbai rejected this second petition, relying on the principles in Syed Sirajis Salikin Khadri vs. Edelweiss Asset Reconstruction Company Ltd. & Anr. and Ashwani Kumar Oberoi v. State Bank of India & Ors., holding it to be an abuse of the legal process. The NCLAT, while distinguishing the present facts from Getz Cables Private Limited versus State Bank of India and another, upheld the NCLT's view, noting that the "yawning time-gap" and repetitive filings proved the intent was not resolution, but evasion.

Case Details:
Case No.: Comp. App. (AT) (Ins) No. 1335 of 2026
Case Title: Pankaj Chhabildas Sheth v. Abhyudaya Co-Operative Bank Ltd.
Appearances:
For the Petitioner(s): Ms. Eshna Kumar, Ms. Sabari Kirubakaran & Ms. Artha Agrawal, Advocates

Source: 2026 CaseBase(NCLAT) 25